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Securities Act Exemptions/

Private Placements
December 2012

NY2 711869

Securities Act of 1933 Registration

5 - Must register all transactions absent an exemption from the
registration requirements
4 - Transactional exemptions
4(a)(2) - Private Placement Exemption
Transactions by an issuer not involving any public offering.

Section 4(a)(1) exemption evolved in practice

Not embedded in the Securities Act

Lack of access to public capital markets increases importance of

exemptions from Section 5 registration requirements

What We Will Cover

Regulation D and the JOBS Act
Regulation A
Intrastate Offerings
Rule 701

Section 4(a)(2)

Section 4(a)(2)
Issuer exemption
most utilized issuer exemption
application of the private placement exemption, however, has been the subject of
significant debate due in large part to the brevity of its wording
not a public offering has been defined by case law and SEC interpretation and
one may look to safe harbors as well

Transactional exemption
Restricted securities securities sold in a private placement may not
be resold absent registration or exemption from registration

Exemptions: 4(a)(2) and Ralston-Purina

SEC v. Ralston Purina Co., 346 U.S. 119 (1953)
Supreme Court confirmed SEC position that offers and sales to a large
number of employees by Ralston Purina under its stock plan were not
exempt under Section 4(a)(2); provided the following guidance:
4(a)(2) exemption focuses on offerees and not actual purchasers of the
4(a)(2) exemption does not depend upon a numerical test; Court rejected SEC
argument that extensive number of offerees was sufficient by itself to establish
loss of exemption.
Availability of 4(a)(2) exemption should turn on whether the particular class of
personsneed the protection of the [33] Act and whether the offerees are
shown to be able to fend for themselves.
Court stated that where offerees do not have access to the kind of information
that a registration statement would disclose, issuer required to provide same
kind of information that otherwise generally would be available in a registration

Safe Harbors

Safe Harbors
Rules and regulations that set forth conditions the satisfaction of
which will ensure that there has not been a public offering
Regulation D for offerings

Regulation D Rules 501-508

Exemption for certain offerings by issuers under $5 million (Rules 504 and 505)
Private placement safe harbor (Rule 506)

Non-exclusive safe harbor

4(a)(2) still available (to the extent general advertising and general
solicitation are not used)

Rule 506 Safe Harbor Requirements

Rule 506 is the most widely used exemptive rule under Regulation
D, accounting for the overwhelming majority of capital raised under
Regulation D.
Current requirements of a Rule 506 private placement include:
No dollar limit on size of transaction.
Unlimited number of accredited investors and no more than 35 unaccredited
No general solicitation or advertising.
Resale limitations.
Disclosure required for non-accredited investors.
Form D filing within 15 days of first sale of securities.
Good faith effort to comply (Rule 508).

Currently, no bad actor disqualification provisions


Rule 506 Purchasers

Accredited Investors (Rule 501)
Institutional investors such as banks, S+Ls, broker-dealers, insurance companies,
investment companies
Corporations or trusts with assets in excess of $5 million
Not formed for purpose of making the investment (look-through rule)
Directors and officers of the issuer
Individuals with
Income > $200,000 or joint income > $300,000
Net worth or joint net worth > $1 million*
Entity in which all equity owners are accredited investors

* Dodd-Frank Act of 2010 amended definition to eliminate ability of individuals to include the equity value of
primary residences in calculation of net worth


Rule 506 Purchasers (contd)

Non-accredited investors
Sophistication required
Alone or with Purchaser Representative


Accredited Investor Reviews

Dodd-Frank Act provides that, upon enactment and for four years
following enactment, the net worth threshold for accredited investor
status will be $1 million, excluding the equity value (if any) of the
investors primary residence
One year after enactment, the SEC is authorized to review the
definition of the term accredited investor (as it is applied to natural
persons) and to adopt rules that adjust the definition, except for
modifying the net worth threshold
Four years after enactment, and every four years thereafter, the
SEC must review the accredited investor definition as applied to
natural persons, including adjusting the threshold (although it may
not be lowered below $1 million)


Accredited Investor Guidance

The SEC provided additional guidance regarding the net worth
C&DI Question 179.01: Under Section 413(a) of the Dodd-Frank Act, the net
worth standard for an accredited investor, as set forth in Securities Act Rules 215
and 501(a)(5), is adjusted to delete from the calculation of net worth the value of
the primary residence of the investor. How should the value of the primary
residence be determined for purposes of calculating an investors net worth?
Answer: Section 413(a) of the Dodd-Frank Act does not define the term value,
nor does it address the treatment of mortgage and other indebtedness secured by
the residence for purposes of the net worth calculation. As required by Section
413(a) of the Dodd-Frank Act, the Commission will issue amendments to its rules
to conform them to the adjustment to the accredited investor net worth standard
made by the Act. However, Section 413(a) provides that the adjustment is
effective upon enactment of the Act. When determining net worth for purposes of
Securities Act Rules 215 and 501(a)(5), the value of the persons primary
residence must be excluded. Pending implementation of the changes to the
Commissions rules required by the Act, the related amount of indebtedness
secured by the primary residence up to its fair market value may also be
excluded. Indebtedness secured by the residence in excess of the value of the
home should be considered a liability and deducted from the investors net worth.
[July 23, 2010]

New Accredited Investor Definition

On December 21, 2011, the SEC adopted final rules, amending the
accredited investor standard to reflect the requirements of the Dodd-Frank
As amended, the new individual net worth standard in the accredited
investor definition under rule 215 and rule 501 of Regulation D is:
Any natural person whose individual net worth, or joint net worth with that persons spouse,
exceeds $1,000,000.
The persons primary residence shall not be included as an asset;
Indebtedness that is secured by the persons primary residence, up to the estimated fair
market value of the primary residence at the time of the sale of securities, shall not be
included as a liability (except that if the amount of such indebtedness outstanding at the
time of the sale of securities exceeds the amount outstanding 60 days before such time,
other than as a result of the acquisition of the primary residence, the amount of such
excess shall be included as a liability); and
Indebtedness that is secured by the persons primary residence in excess of the
estimated fair market value of the primary residence at the time of the sale of securities
shall be included as a liability.


No General Solicitation or Advertising

Prohibition applies to issuer and its agents
Rule 502(c)
No general solicitation or advertising
No seminar with attendees invited by general solicitation or advertising

Importance of preexisting substantive relationship with offerees

Importance of process safeguards
The significance of being in registration
Black Box and Squadron, Elenoff No-Action letters (QIBs and a limited number of
institutional accredited investors) and C&DI guidance

Rule 135c
Safe harbor for limited issuer announcement of exempt offering

The JOBS Act: Rule 506 Changes

The JOBS Act contains various provisions that affect exempt
Title II of the JOBS Act directs the SEC to eliminate the ban on
general solicitation and general advertising for certain offerings
under Rule 506 of Regulation D, provided that the securities are sold
only to accredited investors, and under Rule 144A offerings,
provided that the securities are sold only to persons who the seller
(and any person acting on behalf of the seller) reasonably believes
is a QIB.


Title II: SEC Proposal

On August 29, 2012, the SEC proposed amendments to Rule 506 of
Regulation D and Rule 144A under the Securities Act to implement
Section 201(a) of the JOBS Act.
Public comment period closed on October 5, 2012.
The SECs proposed rules implement a bifurcated approach to Rule
506 offerings.
As proposed, an issuer may still choose to conduct a private offering in reliance
on Rule 506 without using general solicitation, thereby avoiding the enhanced
verification requirement


Title II: SEC Proposal (contd)

In order to implement this approach, the SEC proposed new
paragraph (c) in Rule 506, which would permit the use of general
solicitation, subject to the following conditions:
The issuer must take reasonable steps to verify that the purchasers of the
securities are accredited investors;
All purchasers of securities must be accredited investors, either because they
come within one of the enumerated categories of persons that qualify as
accredited investors or the issuer reasonably believes that they qualify as
accredited investors, at the time of the sale of the securities; and
The conditions of Rule 501 and Rules 502(a) and 502(d) are satisfied.


Title II: SEC Proposal (contd)

Reasonable efforts to verify investor status may differ depending
on the facts and circumstances, and the SEC provides the following
non-exhaustive list of factors that may be appropriate to consider:
The nature of the purchaser. The SEC describes the different types of accredited
investors, including broker-dealers, investment companies or business
development companies, employee benefit plans, and wealthy individuals and
The nature and amount of information about the purchaser. Simply put, the SEC
states that the more information an issuer has indicating that a prospective
purchaser is an accredited investor, the fewer steps it would have to take, and
vice versa.
The nature of the offering. The nature of the offering may be relevant in
determining the reasonableness of steps taken to verify status, i.e., issuers may
be required to take additional verification steps to the extent that solicitations are
made broadly, such as through a website accessible to the general public, or
through the use of social media or email. By contrast, less intrusive verification
steps may be required to the extent that solicitations are directed at investors that
are pre-screened by a reliable third party.


Title II: SEC Proposal (contd)

The SEC confirmed the view that Congress did not intend to eliminate the existing
reasonable belief standard in Rule 501(a) of the Securities Act or for Rule 506
It confirmed that if a person were to supply false information to an issuer claiming
status as an accredited investor, the issuer would not lose the ability to rely on the
proposed Rule 506(c) exemption for that offering, provided the issuer took
reasonable steps to verify that the purchaser was an accredited investor and had
a reasonable belief that such purchaser was an accredited investor.
The SEC also proposed to add a separate check box on Form D for issuers to
indicate whether they are claiming an exemption under Rule 506(c).
The SEC confirmed that privately offered funds can make a general solicitation under
amended Rule 506 without losing the ability to rely on the exclusions from the
definition of an investment company available under Section 3(c)(1) and 3(c)(7) of
the Investment Company Act.


Title II: SEC Proposal (contd)

In addition to the proposed changes to Rule 506, the SEC proposed
to amend Rule 144A to eliminate references to offer and offeree,
and thus require only that the securities are sold to a QIB or to a
purchaser that the seller and any person acting on behalf of the
seller reasonably believe is a QIB.
Under this proposed amendment, resales of securities pursuant to
Rule 144A could be conducted using general solicitation, so long as
the purchasers are limited in this manner.


Resale Limitations
Rule 502(d)
The issuer shall exercise reasonable care to assure that the purchasers of the
securities are not underwriters.

Reasonable care =
Reasonable inquiry of purchasers
Written disclosure to purchasers that resale is restricted


Disclosure Requirement
None mandated for accredited investors or for Rule 504 transactions
(< $1 million)
Anti-fraud rules apply

Mandated for non-accredited investors (Rule 502(b))

Generally, registration statement-like disclosure
Financial statement requirement varies based on size of transaction


New Bad Actor Disqualification

On May 25, 2011, the SEC proposed amendments to rules
promulgated under Regulation D to implement the Dodd-Frank Act
Section 926s provision regarding bad actors for Regulation D.
Unlike Rule 505 of Regulation D, Regulation E and Regulation A,
Rule 506 of Regulation D does not currently have any bad actor
disqualification provisions.
Bad actor disqualification requirements prohibit issuers and others, such as
underwriters, placement agents, directors, officers, and shareholders of the
issuer, from participating in exempt securities offerings, if they have been
convicted of, or are subject to court or administrative sanctions for, securities
fraud or other violations of specified laws.

Bad actor provisions expected to be finalized at or about the same

time as the SEC finalizes rules relating to Rule 506 and Rule 144A.


Blue Sky Considerations

Securities that are sold pursuant to Rule 506 are considered
covered securities for purposes of Section 18(b)(4)(D) of the
Securities Act
This means that securities sold in reliance on Rule 506 are exempt from state
securities review

An issuer that relies on Section 4(a)(2) will need to consider state

securities requirements


Regulation D Summary
Rule 504

Rule 505

Rule 506

Aggregate Offering Price


$1,000,000 (12 mos.)

$5,000,000 (12 mos.)


Number of Investors


35 plus unlimited accredited

35 plus unlimited accredited

Investor Qualifications

None required

None required

Purchaser must be sophisticated

(alone or with representative);
accredited presumed to be

Sales Commissions




Limitations on Manner of

Usually no general solicitation


No general solicitation permitted

No general solicitation permitted

currently, pending JOBS Act

Limitations on Resale

Usually restricted



Issuer Qualifications

No Exchange Act reporting

blank-check or investment

No investment companies or
issuers disqualified under
Regulation A (except upon SEC


Notice of Sales

5 copies of form D to be filed with SEC within 15 days after first sale (called for by Regulation D, but not
required for exemption).

Information Requirements


1. If purchased solely by accredited investors, no information



Regulation D Summary (contd)

Rule 504
Information Requirements

Rule 505

Rule 506

2. If purchased by nonaccredited investors,

a. nonreporting companies under the Exchange Act must furnish the
same kind of information as in a registered offering, or in a
Regulation A offering if eligible, but with somewhat modified financial
statement requirements;
b. reporting companies must furnish (i) specified Exchange Act
documents or (ii) information contained in the most recent specified
Exchange Act report or Securities Act registration statement on
specific forms, plus, in any case, (iii) updating information and limited
additional information about the offering.
c. Issuers must make available prior to sale:
i. Exhibits
ii. Written information given to accredited investors;
iii. Opportunity to ask questions and receive answers;
d. Issuers must advise purchasers of the limitations on resale.


4(a)(2) Remains Available

The JOBS Act does not amend Section 4(a)(2); it only requires the
SEC to amend Rule 506
SEC Rel. No. 33-4552 (Nov. 6, 1962)
Relationship between offerees and issuer
Nature, scope, size and manner of offering

ABA Federal Regulation of Securities Committee, Section 4(2) and

Statutory Law, 31 Bus. Law. 485 (1975)
Offeree qualification
Availability of information
Manner of offering
Absence of redistribution



Prevents circumvention of registration requirements by separating
single non-exempt offering into several exempt offerings
Six-month safe harbor Rule 502(a)
Proposed to be reduced to 90 days
SECs integration doctrine may apply to an offering that otherwise
qualifies for an exemption under Regulation D


Integration Five Factors Test

Under SECs integration doctrine, the following factors (five
factors) are considered in determining whether one sale of
securities by an issuer will be integrated with (i.e., treated as part of
the same offering as) a prior or subsequent offer or sale of
securities by the issuer:

Part of a single financing plan;

Issuances of the same class of securities;
Sales occur at or about the same time;
Same type of consideration is received; and
Proceeds will be used for same general purpose.


Integration Safe Harbors

Safe harbor for offshore offerings
Regulation S (Reg S) provides that offshore sales under Reg S generally are not
integrated with offerings in the United States.

Rule 152
Provides that the phrase transactions by an issuer not involving any public
offering contained in Section 4(a)(2) of the Securities Act will be deemed to apply
to transactions not involving any public offering at the time of the transactions
although the issuer subsequently decides to make a public offering and/or files a
registration statement.
Practical application: If a good private placement is either completed (or
abandoned), the transaction will not be integrated with a later public offering of
additional securities (or of the abandoned unsold securities), and the five-factor
integration test need not be applied.


Integration Safe Harbors (contd)

Rule 155(b) Private Registered
Safe harbor for changing a private offering into a registered offering so long
No securities are sold in the private offering,
All offering activity is terminated prior to filing the registration statement,
The prospectus for the public offering discloses certain information about
the private offering. and
The registration statement is not filed until at least 30 days after the
termination of all offering activity, unless the private offering was made
only to accredited or sophisticated investors, in which case the issuer
may file immediately after terminating the private offering.


Integration Safe Harbors (contd)

Rule 155(c) Registered Private
Safe harbor for abandoning a registered offering and conducting a private
offering so long as
No securities are sold in the registered offering,
The issuer withdraws the registration statement,
The private offering does not commence until 30 days after withdrawal of
the registration statement,
The issuer notifies the private offerees that (1) the offering is not
registered, (2) the securities will be restricted, (3) protection under
Section 11 of the Securities Act will not be afforded and (4) a registration
statement was filed and withdrawn, and
The private offering materials disclose any material changes to the
issuers affairs that are material to the investment decision in the private


Integration No-Action Letters

Black Box and Squadron, Ellenoff SEC No-Action Letters
Facts: Restructuring involving the following transactions to occur simultaneously:
Existing security holders to receive new securities in a private placement in
exchange for existing securities,
New capital to be raised in a private placement of convertible debentures and
New capital to be raised in an initial public offering.
Outcome: The private placement with existing security holders and the private
placement of the convertible debentures need not be integrated with the later
public offering because
The existing security holders and investors would have entered into their
respective agreements prior to the filing of the registration statement and
The private placements would be completed prior to the filing given that the
obligations to acquire the securities would be subject only to the satisfaction
of specified conditions outside of the control of the security holders and


Integration No-Action Letters (contd)

If the private placement of the convertible debentures was made only to
qualified institutional buyers (QIBs) and three or four accredited investors,
the private placement need not be integrated with the public offering even if it
would not be completed at the time the registration statement was filed.
If the private placement of the convertible debentures was terminated prior to
completion and later there is a registered offering of the debentures based on
Rule 152, the abandoned private placement would not be integrated with the
public offering.
The filing of a registration statement is deemed to be the commencement of
the public offering.
Subsequent Clarifications
The SEC later clarified that the number of offerees and purchasers is a factor
in evaluating the applicability of the policy and the policy is limited to situations
involving QIBs and no more than two or three large institutional accredited


Integration SEC Interpretive Guidance

See principally C&DI 139.25, which addresses a side-by-side private
offering (under Section 4(a)(2) or Rule 506) with a registered public
offering without having to limit the private offering to QIBs and a
small number of large institutional accredited investors
The focus is on how the investors in the private offering are solicited
Investors were not identified or contacted in connection with the public offering
Investors did not contact the issuer as a result of the general solicitation by
means of the registration statement




Private Placement Documentation

Prospective Investor Questionnaire
Subscription or Purchase Agreement
Purchaser Representations
Resale Restrictions

May also include:

Registration Rights Agreement
Investor Rights Agreement
Stockholders Agreement
Voting Agreement
Legal Opinion


Private Placement Documentation (contd)

Disclosure Documents
Rule 144A style offering memorandum quasi-prospectus
Private placement memorandum
Wrap around public disclosures
More detailed disclosure style


Practical Tips
Just Say No to Non-accredited Investors
Litigation Risk
Shareholder Relations

Disclosure Documents
No material omissions
Not marketing documents
20/20 hindsight
Dont assume that the representations in the final documents will save you from
exposure if you use aggressive marketing documents


Practical Tips (contd)

Control of the Shareholder Base
Keep the number down and keep current contact information
Voting agreements
Protective provisions
Tripping threshold for Exchange Act reporting, as amended by the JOBS Act:
Total assets exceeding $10m as of the last day of the companys fiscal year,
A class of equity securities held of record by either (i) 2,000 persons, or (ii)
500 persons who are not accredited investors (for banks and bank holding
companies, a class of equity securities held of record by 2,000 or more
Holders of record excludes certain persons, including, for example, employees
who received options in exempt transactions


Other Offering Exemptions


Small Offerings
3(b) authorizes SEC to exempt offerings of < $5 million during
a 12-month period
Implementing Rules
Rule 504 of Reg. D (up to $1 million)
Rule 505 of Reg. D (up to $5 million)
Regulation A


Reg A Basics
Eligible issuers - principal place of business in the United States or
Canada, and not subject to Section 13 or Section 15 reporting
before the offering and not disqualified
Primary offerings or secondary offerings (subject to certain
Bad actor disqualification
Offering threshold currently $5m per 12-month period, or $1.5m for
selling stockholder (not aggregated with other exempt offerings)
Requires filing of a Form 1-A Offering Statement and delivery of
Offering Statement to investors
Integration safe harbors not integrated with subsequent Reg S
offerings or 701 offerings or completed exempt offerings (Section
4(a)(2) or Reg D). Other than the safe harbor, one would consider
the same fivefactor test.

Reg A Basics (contd)

Currently, Regulation A allows for an offering of up to $5 million of
securities of an issuer including up to $1.5 million of securities
offered by selling security holders in any 12-month period.
Requires filing of a Form 1-A Offering Statement and delivery of
Offering Circular to investors.
Offering communications - under Reg A, an issuer may test the
Nature of the securities - the securities sold in reliance on Reg A are
not restricted securities
Blue sky


Title IV: Offering Exemption

Title IV of the JOBS Act establishes a new offering exemption
similar to Regulation A, the Section 3(b)(2) exemption.
Under the exemption, an issuer will be able to offer and sell up to
$50 million in securities within a 12-month period without Securities
Act registration. The issuer may offer equity securities, debt
securities, and debt securities convertible or exchangeable for equity
interests, including any guarantees of such securities.
The SEC Staff is working on proposed rules, although there is no
deadline in the JOBS Act for these rules.


Intrastate Offerings
3(a)(11) exempts securities offered and sold only to persons
resident in a single state by an issuer incorporated in and doing
business in that state
Rule 147 Safe Harbor
Practical limitations
Strict compliance required
Resales limited to state residents until securities come to rest (Rule 147 = 9 mos.)


Rule 701
Exemption for compensatory issuances by private companies to
directors, employees, consultants and advisors
In any 12-month period, not more than greatest of:
$1 million
15% of total assets
15% of class

Disclosure required:
Written plan or contract
Additional disclosure if > $5 million sold in any 12-month period

No integration
Restricted securities but may be resold 90 days after IPO by nonaffiliates


Other Registration Exemptions

Rule 144A
Exempts resales of privately placed securities to QIBs

Regulation S (Rules 901-905)

Safe harbor exemption for offshore transactions

Exemption for securities issued in complete or partial exchange for outstanding
securities where the terms of the issuance and exchange are approved in a state
fairness hearing
Practical alternative to private placement exemption in M&A context


Crowdfunding permits entrepreneur to pool money from individuals
who have a common interest and are wiling to contribute to a venture
Crowdfunding may or may not involve the sale of securities
To the extent the effort involves the sale of securities then the
offering must be registered or must rely on an exemption
A recent enforcement action highlighted this issue


Title III: Crowdfunding

Title III of the JOBS Act addresses crowdfunding, which involves
seeking funding over the Internet from a potentially large group of
investors putting up relatively small amounts.
Given the difficulty in relying on existing exemptions from registration
for crowdfunding efforts involving the offer and sale of securities, the
JOBS Act amended Section 4(a) of the 1933 Act to add a new
paragraph (6), which provides a new crowdfunding exemption from
SEC registration, as well as preemption from state Blue Sky laws.
The SEC is required to adopt rules implementing the crowdfunding
exemption by December 31, 2012, and the SEC Staff has indicated
that they are currently working on rule proposals.